This is going to be the first entry to a series talking about my story and how I stumbled into the realm of personal finance and eventually financial independence. I plan to talk about all of the things I’ve found helpful up until this point as well as document my personal progress as I try to reach goals and better myself. I believe consistent writing is both a perfect form of documenting my progress as well as self-accountability to keep myself heading in the right direction (maybe even public accountability if anyone ever stumbles across this and finds my writing interesting!). Anyways, here is the first installment of this series where I will talk about how I began to think about money as I was approaching college graduation:
When I was nearing the end of undergrad, I had a friend who had already graduated and was already a couple years into his career. I don’t know how this came up, but he told me to start saving right away and to check out the subreddit /r/personalfinance. I checked it out and read it sometimes, particularly this flowchart found in the sidebar. It had immediate appeal because it was so structured and simple to follow. I immediately set a goal to be able to follow it all the way to the bottom. At my job, I didn’t have access to a 401k immediately, so my 2 initial goals were to open and max a Roth IRA and build an emergency fund. I arbitrarily chose $10,000 as my goal for this, moved back home, and got to working.
From a financial perspective, moving back in with my parents after graduating college was a very smart decision. This isn’t always possible, but the job I got was in my hometown and my parents were happy to help me out, so that I didn’t have to put a ludicrous percentage of my salary towards rent.
As of writing this, I’d been back in my childhood house for just over a year, and was in the process of apartment hunting, but let us assume it will be a 1 year for our calculations for simplicity. Now for some rough estimations! Say I wanted to live with one roommate in a 2 bedroom apartment near-ish to my office: this would run me $1,200-2,000/month. So we will assume $1,500/month, a combined $500 for food/utilities/other misc benefits I’d forego by moving out of my home. So roughly $2,000 per month that I otherwise wouldn’t be spending over the course of 1 year, for a grand total of $24,000. And this number could be much higher. I know some people paying north of $2,500/month for rent and they eat out for nearly every meal! Obviously this is not ideal and I’m not one to spend that much money if I don’t have to, but I’m very comfortable saying that one year at home with my folks will have saved me in the vicinity of the $24,000 figure previously mentioned. And lastly, we will assume a $60,000 salary, a 5% employer match for a 401k, and only federal taxes as state taxes vary (and assuming filing as Single).
Now that we’ve got some base lines, we will have 2 different scenarios. For the first, we will be living at home and contributing this extra $2,000/month to a traditional 401k, as well as a Roth IRA. And for the second, we will be spending this $2,000/month and only contributing in our 401k 5% to get the employer match, as this is the traditional wisdom given to people just starting their working career. The following tables outline the differences in invested amounts between the two after one year:
So right off the bat, we can see AGI difference is pretty drastic and as a result you’re able to save a little over $3,000 on federal income tax. This is an immediate benefit as it’s easy to notice if your monthly take home is $250 higher! But then there’s the long term benefit. This is where our friend compound interest comes into play. If we simply let these two account balances sit and grow for 20 years at 7% annual return, this is what we see:
Saving and investing $2,000 a month by living at home for just 1 year can lead to a $80,000 difference. This one small trick could be massively impactful in the future financial states of new grads, assuming this is a possibility for them. It might not seem like much at the time, and it’s only for 1 year, but the long run difference is staggering. If you stack on other things like cutting expenses, or avoiding lifestyle inflation that comes along with earning money for the first time in your life and wanting to completely change your spending habits from broke college student to young professional, this could be even more. You want to be on the right side of compounding interest. There’s no downside to setting aside as you comfortably can when you’re young and the upside is more money for your future self! And if you grow your next egg early, there’s less pressure if issues come up down the line and you’re not able to contribute as much for whatever reason. Doing so gives so much financial flexibility later in life.
Clearly not everyone has a great relationship with their parents, nor will everyone get their first job in their hometown. But for those people that can tick both of these boxes, this is definitely something to consider.
Let me know your thoughts in the comments below! Did you live at home following college graduation? Do you regret it? And if you didn’t but could have, do you ever wish you did?